Monday, 5 December 2011

If the Eurozone does collapse, or if
there is just a second European credit crunch, then Britain will be
relatively insulated. We will still suffer a lot, but less
than the Eurozone itself. However, the EU has a useful mechanism for
sharing the pain: labour migration, guaranteed by freedom of movement
within Europe. Although it is low compared to the US, it has still
been high enough over the past decade to make immigration a big
political issue in Britain. The government has pledged to cut
immigration to the tens of thousands. Good luck with that when
Eurozone unemployment increases above its already high level. There
will be increasing pressure to pull up the drawbridges.

In the short run, the ECB to buy
member states' bonds, or to issue Eurobonds.

In the long run, centralized
budgetary discipline in the Eurozone...

… and perhaps much greater
transfers to provide “automatic stabilizers”

On the face of it (1) and (2) do not
sit well together. The argument for combining them is that the
alternative is disastrous: government default, one or more countries
leaving the Euro, bank runs which governments can no longer prevent,
and perhaps a second Great Depression.

Almost anything would be justified to
avoid a really serious depression, because events on that scale do
not just impose economic hardship – they also risk devolving into
political chaos. For instance, I have heard the Great Depression and
the collapse of world trade cited as a cause of World War Two, though
I don't know enough history to evaluate that claim.

On the other hand, the argument is not
completely obvious.

First, it isn't necessary to leave the
Euro in order to default. Greece, for example, is keen to stay in the
Euro. The cost of staying in the Euro is being stuck with an
uncompetitive exchange rate. But countries have survived that. By
defaulting they would at least rid themselves of the debt overhang
that is forcing them to cut, cut, cut government spending in the
midst of a recession. The cost of leaving the Euro is being stuck
with a less credible currency, and probably facing bank runs as a
result.

On the other hand, if countries do
leave the Euro, that may not be disastrous for them. (Or why would
they do it voluntarily?) Britain was forced to float its currency 20
years ago; the Conservative government was humiliated, but the
economic results were actually beneficial, weren't they? There is a
trade-off: chaos at exit versus increased competitiveness with your
own currency afterwards.

At the very least, the economic tail is
wagging the political dog. European government structures are being
created as a panicked response to a crisis. These structures are
likely to be less democratic, more centralized (with Germany being
the centre), and also to set in stone the Eurozone's problems, as
follows:

There will still be a single
currency without the integrated labour markets that would help it to
work.

There will still be the temptation
to fiscal indiscipline, which will have to be prevented by
centralized control.

Fans of democracy, freedom and
responsible politics should not find this an appealing prospect. It
would also be a national defeat for Britain, because we would be on
the periphery of a large centralized Eurozone with very different
economic interests and values to our own.

If the alternative is really a global
economic collapse then perhaps this is the best choice of a bad
bunch. My personal nightmare is different:

Europe centralizes;

Established parties, and elites
more generally, face an ever-stronger backlash from their “angry
and defrauded young”;

A new generation of populists
enters national governments. They offer fantasy solutions, play fast
and loose with deficits, and fail to exercise mutual discipline at
European level.

We have a century of
Argentina-style distributive politics, relative decline, and
domination by a resurgent Russia.

My instinct is that failed ideas should
be discarded; but if we are going to have the Euro, it seems better
to have fiscal discipline and a hard budget constraint – a core
condition for “market-preserving federalism”. The US has achieved
this, so why can't Europe?

Perhaps I am missing something and
there's an obvious reason that a default means a Euro collapse, and
that Euro breakup must inevitably be an economic catastrophe.
Certainly lots of people think so. However, perhaps some of the
current panic comes from businessmen and bankers who naturally
confuse short-term harm to themselves with the end of civilization.